If someone offered you a choice between $10000 or $20000, which one would you choose? Of course you’ll choose $20000. What kind of a dumb question is that, right?
But, what if someone offers you a choice between $10000 today and $20000 after two months? Now, which one would you choose?
The answer is no longer straightforward. It depends on many factors. Primarily, it depends on your current needs.
$20000 is more profitable, all things being equal. Unfortunately, as you run a business you’ll realise that you can’t always make decisions purely based on profitability.
If you have to pay salaries, not having money to pay your employees on time can almost instantly land you in trouble. Miss paying one month’s salary, and most of your employees will start looking elsewhere for a job.
You can offer to pay them double once your 20k arrives, but it won’t fix the situation. Employees are used to stability and safety, and any kind of risk scares them.
In that situation, 10k today is better than 20k in two months. There are a few more situations like this. Paying rent, paying loan installments, paying your vendors and contractors, etc. Many businesses that show a profit at the end of the financial year end up closing down due to just this.
This is the reason that makes cash flow the most important metric of measuring your business health. When you are able to dependably plan to get money (receivables) before your need to spend it (payables), your business will be on its way to sustainable growth.
Keep an eye out for your receivables and payables. Make sure you always, yes ALWAYS, have enough to meet your most important expenses.
Sometimes, things are beyond your control. If you sense you cannot pay on time, inform those who depend on you well ahead of time. Don’t wait till the last moment for some miracle to happen.
Prioritize cash flow. Profitability is great, but it can wait.
What do you think?
Yours,
Abhilash Purohit